Zimbabwe Implements Measures to Stabilise Local Currency and Prevent Externalisation

Zimbabwe recently introduced a series of measures to fortify its local currency and mitigate the risk of capital flight. These initiatives, implemented by President Emmerson Mnangagwa’s government, seek to promote domestic macroeconomic stability and curb inflation, ensuring a more resilient economy.

Recognising  the duality of Zimbabwe’s currency system, the government has adopted a two-pronged approach to address the issue. Firstly, government agencies are being urged to encourage payments in the local currency, fostering its usage and bolstering its value. Simultaneously, businesses and individuals with foreign currency holdings are being incentivized to utilize the formal banking system, thereby promoting transparency and discouraging externalisation.

Despite a considerable increase in local production, Zimbabwe has witnessed a sharp rise in food prices in recent weeks. To address this concern, the government recently lifted restrictions on the importation of basic goods by the public. This move aims to ensure a steady supply of essential items, thereby stabilizing prices and alleviating the burden on consumers.

The latest measures were highly anticipated following Finance Minister Professor Mthuli Ncube’s surprise tour of shops and supermarkets in Bulawayo, Zimbabwe’s second-largest city. Minister Ncube emphasized the importance of striking a balance between supporting businesses and safeguarding the public against wage contraction and escalating prices of essential commodities.

Furthermore, the government’s recent participation in a conference on Zimbabwe’s foreign debt restructuring, led by the Africa Development Bank in Egypt, reflects its commitment to addressing economic challenges. As part of the new measures, the government has taken on the responsibility of repaying all foreign currency-denominated loans contracted through the Reserve Bank of Zimbabwe. By adopting a transparent approach and settling these loans through the National Budget, the government aims to restore confidence in the economy and alleviate concerns regarding the management of foreign debt.

In an effort to curb the creation of additional money supply, the government will assume responsibility for funding the Zimbabwe dollar component of the 25 percent foreign currency surrendered by exporters. This strategic move seeks to eliminate the potential inflationary impact caused by excessive money supply.

A notable measure that has been applauded by analysts is the increase in the retention rate on domestic foreign currency sales to 100 percent. This step enables local businesses to access more foreign currency from the market, leading to potential growth in US dollar deposits within the banking system. By ensuring a stable supply of foreign currency, the government aims to stabilize the exchange rate and reduce inflationary pressures.

To encourage the use of the domestic currency, government agencies and parastatals will now predominantly collect fees in the local currency. This policy aims to stimulate demand and stabilize the value of the Zimbabwe dollar. Additionally, non-exporters will be required to make payments to the Zimbabwe Electricity Supply Authority (ZESA) in the local currency, further emphasizing the significance of domestic transactions.

In order to discourage the externalisation of funds, the government has implemented a 1% tax on all foreign payments, alongside maintaining the existing 2% USD cash withdrawal tax. These measures aim to generate revenue for the government and discourage the outflow of capital. Furthermore, excise duty on fuel will now be payable in foreign currency, highlighting the government’s commitment to managing foreign currency usage efficiently.

In a bid to promote the banking of foreign currency in the informal sector, the government has reduced the local interbank foreign transaction tax and the Point of Sale (POS) tax in foreign currency to 1%. These reductions serve as incentives for individuals and businesses to deposit their foreign currency holdings in banks, thereby increasing the availability of foreign currency within the formal financial system.

In addition to these measures, the government plans to strengthen surveillance and monitoring of externalisation of funds and transfer pricing. This comprehensive approach will be complemented by the establishment of a robust foreign currency payment system and enhanced information sharing between financial institutions and the Zimbabwe Revenue Authority (ZIMRA). By bolstering oversight in these critical areas, the government aims to curb illicit financial flows and promote transparency in economic transactions.

The Zimbabwean government has reiterated its commitment to fostering domestic macroeconomic stability, curbing currency depreciation, and restoring confidence in the economy through the implementation of a range of measures under the National Development Strategy 1. These measures address the pressing challenges of inflation, exchange rate fluctuations, and price increases, ultimately benefiting both businesses and consumers.

The introduction of a 1% tax on all foreign payments is a crucial step towards generating much-needed revenue while discouraging the externalisation of funds. By imposing this tax, the government aims to ensure that foreign currency remains within the country’s financial system, contributing to its stability and availability for essential transactions. Simultaneously, the maintenance of the 2% USD cash withdrawal tax is aimed at managing and optimizing the use of foreign currency.

To further encourage the banking of foreign currency in the informal sector, the government has reduced the local interbank foreign transaction tax and the POS tax in foreign currency to 1%. These reductions serve as powerful incentives for individuals and businesses to deposit their foreign currency holdings in banks. By strengthening the formal financial system, Zimbabwe can enhance its capacity to manage foreign currency effectively, leading to increased stability and economic growth.

However, critics argue that while the measures introduced by the Zimbabwean government aim to stabilize the local currency and address concerns of externalisation, there are several challenges and potential drawbacks to consider.

Firstly, some critics express skepticism about the effectiveness of these measures in achieving the desired outcomes. They argue that previous attempts to stabilise the currency and control inflation have yielded limited results, and there is a lack of confidence in the government’s ability to manage the economy effectively.

The imposition of a 1% tax on all foreign payments has drawn criticism as well. Detractors argue that this tax places an additional burden on businesses and individuals, potentially discouraging foreign investment and hindering economic growth. They suggest that alternative approaches, such as improving the ease of doing business and creating a favorable investment climate, would be more effective in attracting and retaining capital within the country.

Furthermore, critics raise concerns about the government’s ability to enforce oversight and effectively monitor externalisation of funds and transfer pricing. These issues have been persistent challenges in the past, and there is skepticism regarding the government’s capacity to curb illicit financial flows and ensure transparency in economic transactions.

Overall, while the government’s intentions to stabilise the local currency and address externalisation are commendable, critics argue that the effectiveness of these measures remains uncertain. They call for a more comprehensive and holistic approach that addresses structural issues, fosters investor confidence, and focuses on long-term economic stability rather than relying on short-term measures.

Despite the criticisms and challenges raised, there are compelling arguments in favor of the government’s measures to enhance local currency stability and address externalisation concerns in Zimbabwe.

Firstly, the government’s proactive approach demonstrates its recognition of the economic challenges faced by the country and its commitment to taking action. The introduction of a comprehensive set of measures reflects a determination to tackle inflation, stabilize exchange rates, and restore confidence in the economy. These measures, including promoting domestic currency usage, managing external debt, and strengthening oversight, collectively work towards creating a more stable economic environment.

Additionally, the government’s efforts to encourage the use of the formal banking system for foreign currency transactions and incentivize the banking of foreign currency in the informal sector are steps in the right direction. By increasing transparency and ensuring that funds remain within the financial system, these measures contribute to greater financial stability and provide a foundation for economic growth.

The government’s focus on reducing capital flight and illicit financial flows is also commendable. By imposing taxes on foreign payments and enhancing surveillance and monitoring mechanisms, the government aims to discourage externalisation of funds and promote transparency in economic transactions. These actions not only generate revenue for the government but also protect the country’s financial resources and contribute to a more equitable distribution of wealth.

Moreover, the government’s recognition of the importance of addressing external debt and engaging in debt restructuring discussions signifies its commitment to restoring fiscal stability and attracting foreign investment. By adopting transparent loan management practices and assuming responsibility for repaying foreign currency-denominated loans, the government seeks to rebuild confidence in the economy and alleviate concerns regarding the management of foreign debt.

While there may be valid criticisms and challenges to navigate, the government’s measures to enhance local currency stability and prevent externalisation demonstrate a proactive and determined approach to address economic challenges in Zimbabwe. By implementing a comprehensive set of policies, promoting transparency, managing external debt, and curbing illicit financial flows, the government strives to create a stable and resilient economic environment that benefits businesses and citizens alike. These measures lay the groundwork for long-term economic stability and may pave the way for sustainable growth in Zimbabwe.

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